Prospects for a sustained global economic recovery dimmed on Thursday as manufacturing cooled in the United States and European factories sputtered at a time when central banks are running out of policy options.
Although Chinese and Indian manufacturing is growing, the pace is more modest than in the recent past. Slower global demand could crimp exports, the engine for growth in the region.
"For all the optimism that has been around lately, partly because the US has been showing some signs of improvement and the European situation was turning out better than expected, the global economy remains quite soft," said Jeremy Lawson, an economist at BNP Paribas in New York.
The US Institute for Supply Management' index of national factory activity fell to 52.4, indicating a mild expansion and surprising analysts who had looked for an improvement. The index was pulled down by a drop in new orders.
Markit's Euro zone Manufacturing Purchasing Managers' Index (PMI) rose to 49.0 last month from January's 48.8, in line with a flash reading. But it has now been below the 50-mark that divides growth from contraction since July.
The data followed a day after the European Central Bank pumped 530 billion euros of cash into the banking system, likely its last such salvo in a battle to bring down yields on government bonds and stave off a credit crunch.
In the US, Federal Reserve Chairman Ben Bernanke on Wednesday poured cold water on the notion recent upbeat signs herald a stronger recovery. But at the same time, more quantitative easing there is also looking less likely.
A Reuters poll on Thursday predicted that both the ECB and the Bank of England will hold off on further monetary policy easing, a reversal from recent surveys which had the ECB cutting rates one more time and the BoE ramping up its bond purchase programme.
What is most troublesome is that several countries in the euro zone periphery such as Greece, Spain, and to a lesser extent Italy, are in recession, while the strongest economies - Germany and France - are barely growing.
"Clearly the euro zone crisis is having an impact upon global activity, and that is going to be a theme for some time to come," said Peter Dixon at Commerzbank in London.
Unemployment in the bloc rose to a euro-era high of 10.7% in January. The 17-member euro zone is expected to slide into a mild recession in the first half of this year.
Asia Engine Still Running
Asia is slowing but remains the growth engine of the world economy. Its major central banks could also cut interest rates if needed to cushion any further slowdown.
New factory orders for Asia's manufacturing powerhouses perked up in February, with China's factories growing more than expected.
The surveys offered tentative signs of a recovery from the slump in the final months of 2011 caused by faltering external demand and fragile business and consumer sentiment.
But the economic picture was far from complete.
"February numbers should be taken with a pinch of salt since they may be inflated by 'payback' production activity after the Chinese Lunar New Year not fully captured by seasonal adjustments," said Nikolaus Keis at UniCredit.
"Nevertheless, taken together, PMI figures indicate that China's manufacturing activity at least stabilized in February."
India's manufacturing expansion eased back from its strongest pace in eight months for a PMI of 56.6 in February compared with 57.5 in January. However, new orders touched a 10-month high.
Still analysts do not believe the global economy will slip back into recession, unless the European debt crisis deteriorated and war broke out between Israel and Iran.
"We don't see the global economy rolling over by itself at this point," said Wells Fargo Securities' Bryson.
Slower US Growth Forecast
In the United States, growth this quarter is expected slow significantly from the fourth-quarter's 3.0% annualized rate. Consumer spending, which accounts for 70% of economic activity, was flat in January for a third straight month when adjusted for inflation.
"Looking at the US we would be lucky if we see a repeat of fourth-quarter GDP. You are looking at growth in the United States of 1%, and if we are lucky 2%," said Jay Bryson, global economist at Wells Fargo Securities in Charlotte, North Carolina.
But there is reason to be cautiously optimistic on the US. The labor market is strengthening and last week, the number of Americans filing for unemployment benefits hovered near a four year-low.
In Greece, factories are in freefall and its economic data point to depression rather than recession. The country's manufacturing sector shrank at the fastest pace in at least 13 years just as the country is set to be hit by another wave of austerity cuts in return for the latest bailout cash.
In Spain, where the government is struggling to slash its public deficit, factories shed jobs at the fastest rate in more than two years, worsening employment prospects in a country where already more than one-in-five is out of work.
The economic picture remained slightly better in Britain than continental Europe.
But its manufacturing sector grew at a slower pace than expected in February, further evidence that the economy is vulnerable, particularly to any more trouble in the euro zone, its main trading partner.
